74 entries from November 2010

November 30, 2010

When I recently purchased my new Toyota Highlander, I was taking a bit of a leap of faith. At that time Consumer Reports had suspended its recommendations of several Toyota models (including the Highlander) over various issues. I assumed that this was temporary and while it did make me consider the issue and wonder if buying a Toyota was a good idea, obviously I got past that hurdle.

The December 2010 issue of Consumer Reports put to rest any lingering doubts I had as they reinstated their Toyota recommendations. And, as I knew would be the case, the Highlander makes out pretty well.

The magazine lists specific ratings about the Highlander in a couple different areas. On page 67 they list the predicted reliability ratings for midsized SUVs. The top six are as follows:

Toyota FJ Cruiser

Toyota Highlander (4-cyl.)

Toyota Highlander (V6) (recommended buy by CR)

Hyundai Santa Fe (recommended buy by CR)

Nissan Pathfinder

Toyota Highlander Hybrid (recommended buy by CR)

I have the Toyota Highlander V6 -- which has the highest predicted reliability rating for a vehicle recommended by Consumer Reports. (FYI, I also looked at the Honda Pilot. It came in 8th overall and 5th among CR recommended buys.)

Then on page 72, Consumer reports gives their overall midsized SUV ratings based on road-test scores. The top five (which are all CR recommended buys) are:

Kia Sorento

Toyota Highlander Limited (V6)

Hyundai Santa Fe Limited (V6)

Chevrolet Traverse LT

Nissan Murano SL

FYI, the Pilot was #9.

These ratings fit me to a T since I buy for overall value and reliability (plus fit of course -- I'm tall and need to make sure my head isn't hitting the roof). And I put a lot of stock in what CR says -- they've never let me down before -- so I'm happy that they have put Toyota (in general) and the Highlander (specifically) back into their ratings and that my vehicle performed so well.

We also tip (give a gift) to my son's basketball coach and I get a gift (usually a nice tin of cookies) for the workers at my pool.

Cleaning people, teachers, and hairdressers are the only ones that get either cash or a gift from 50% or more of the people.

Cleaning people are by far the best off concerning the amount of the gift ($35 versus $25 being the next highest). Is this because this person usually performs a higher-costing service? Or maybe because the cleaner is more trusted/considered more a part of the family?

How about you? Do you give a holiday tip to these people (or any others) who provide services to you during the year?

This piece from Slate has a calculator about halfway down that's titled "where do I stand?" You put in your zip code and your income and out pops an income comparison between you and those that live in your area of the country and world. Here's a summary of where I net out:

I make roughly four times more than the average/median income in my zip code, state, and country.

96 percent make a lower income than I do.

Before we proceed, let me say that this isn't about bragging. It's about (like this blog has always been) what I'm doing financially and why I advocate certain moves and not others. It's also about me sharing as much about my personal finances as I feel comfortable with (this is, after all, a blog.) So let's forget the size of the income for now and focus on what conclusions we can draw from it.

November 29, 2010

My question is, what resources are available to help someone after they’ve mastered the basics of personal finance?

A little background, I’m mid-30’s, no home, no debt, ~$300k in my 401(k) and another ~$200k in taxable accounts, income of $150k per year and obviously living well below my means. I’ve put a lot of time into reading up on personal finance; I understand the how and why of diversification (across asset classes, countries, currencies), how to use a Roth account, rebalancing, lump sum vs. dollar cost averaging vs. value averaging, etc., etc. I’m not sure if hiring an adviser is the right way to go as I enjoy learning about these subjects, it comes fairly naturally to me, and no one will care about my money as much as I do. I also have the sense that I’d be a very small fish for an adviser at this point.

So where do I go from here? What subjects are going to be helpful in growing my net worth at this stage and become a more sophisticated investor? I'm fine with investing time, and I'm not scared by a little math or new software if that's what's needed. Any guidance from folks who have or are making the jump from intermediate to expert investor?

Give presentations when possible. People don’t just remember great presentations and ideas; they remember the people who delivered the message.

Send status reports frequently. When it comes to increasing your visibility, the name of the game is repetition.

Get favorable testimonials. Nothing reminds people of how brilliant your last idea was than a third-party testimonial from a customer or colleague who brags on your behalf.

Ask for similar successful projects. Focusing on projects that you know you’ll succeed in will help build your manager’s confidence in you.

Load up on projects around review time. The time to really work on getting your due credit is right before review time.

Stay visibly busy. It’s not enough to just take on projects, you need to go a step further and actually look busy.

I think these tips are great suggestions to help grow your income for one reason: they help demonstrate that you deserve a raise. And if a picture is worth a thousand words, the actions above are worth thousands of dollars (in additional income for you.) Here's my take on each of these:

Presentations make you visible and assuming what you say is actually good, can help catapult your career. Of course if you bomb, the fact that you have an audience for your crash landing will also magnify the situation and do more damage to your career than would happen likewise. Two suggestions to make sure you do well: 1) Before you present, run your thoughts/slides by a trusted co-worker -- someone who's well-respected and will give you honest feedback. Then make any adjustments she suggests (and that you think are appropriate.) 2) Rehearse the presentation so you are smooth. HOW you say something is sometimes just as important as WHAT you say. Someone who limps through a presentation might be described as "good", but someone who presents the same presentation with ease and finesse will be remembered for giving a "great" speech.

I recommend a weekly update to your boss to tell what you're doing and the results that are being achieved.

If you can get a customer or co-worker to give a testimonial, that's great. But it's hard to do, of course. One way to help along the process is that if someone expresses appreciation for your work, simply ask him if he'd be willing to pass his thoughts on to your boss as a favor to you. You'll need to be sure it's easy and appropriate for him to do so in advance (and that you won't be crossing any boundaries that would make him feel uncomfortable) so you don't alienate him by asking. But it's worth pursuing if you think he'll do it -- especially if he's an important customer or vital to your company in some other way.

Certainly you'll want projects that you think you'll succeed at -- that goes without saying. But I'll add that you want IMPORTANT projects that you'll succeed at. For instance, it's better to spearhead a team that saves the company $500,000 than it would be to spearhead a team that successfully developed the theme for the company Christmas party. I know, it's an extreme comparison, but I wanted to illustrate the point. Choices like these rarely contrast that much, but you get the idea of what I'm saying.

It's a fact of life that bosses give a disproportionate amount of weight at review time to recent events. So if you've been a stinker the past couple of months, your review will have a tendency to be so-so at best, even if you hit home runs most of the rest of the year. Then again, you might have been a bench player much of the year, but if you've delivered a few big wins over the last few months, it's likely that you'll get a good review (and corresponding raise.) Plan your successes accordingly (to the extent you can.)

Perception is reality. We all know that, right? So if you look busy (even if you aren't), you'll be viewed as a "hard worker." (Of course you don't want to appear so busy that you look frazzled or seem like your job is too much for you.) If you look like you have all the time in the world on your hands, you can't be doing a good job now, can you? I know, I know. Looks don't necessarily relate to performance. But I did say that perception is reality, didn't I?

Amazon summary: In an age of great economic uncertainty when everyone is concerned about money and how they spend what they have, this new edition of the bestselling Your Money or Your Life is an essential read. With updated resources, an easy-to-use index, and anecdotes and examples particularly relevant today-it tells you how to: get out of debt and develop savings, reorder material priorities and live well for less, resolve inner conflicts between values and lifestyle, save the planet while saving money, and much more. In Your Money or Your Life, Vicki Robin shows readers how to gain control of their money and finally begin to make a life, rather than just make a living.

Amazon summary: William Bernstein's The Four Pillars of Investing gives investors the tools they need to construct top-returning portfolios­­without the help of a financial adviser. In a relaxed, nonthreatening style, Dr. Bernstein provides a distinctive blend of market history, investing theory, and behavioral finance, one designed to help every investor become more self-sufficient and make betterinformed investment decisions. The 4 Pillars of Investing explains how any investor can build a solid foundation for investing by focusing on four essential lessons, each building upon the other. Containing all of the tools needed to achieve investing success, without the help of a financial advisor, it presents: Practical investing advice based on fascinating history lessons from the market, exercises to determine risk tolerance as an investor, and an easy-to-understand explanation of risk and reward in the capital markets.

Amazon summary: The advice and concepts outlined in Automatic Wealth are best suited for those in their 30s-50s who recognize that their current job will never afford them true financial independence. Rather than encourage readers to quit their day jobs today and launch into a new scheme tomorrow, Masterson shows how to turn your skills and experience into significantly more money within seven to fifteen years. For those just getting by, he details how to get the biggest pay raises now and how to move into more lucrative ventures in the near future. For those with some savings, he offers specific advice on building equity and increasing net worth significantly and quickly. Since Masterson made his millions starting and developing small businesses, he encourages people to become entrepreneurs themselves and discusses which kinds of ventures to invest in and which ones to avoid. He also stresses the importance of developing multiple income streams, offering chapters on real estate, stocks and bonds, consulting, direct mail, and other opportunities.

Amazon summary: At last, for a generation that's materially ambitious yet financially clueless comes I Will Teach You To Be Rich, Ramit Sethi's 6-week personal finance program for 20-to-35-year-olds. A completely practical approach delivered with a nonjudgmental style that makes readers want to do what Sethi says, it is based around the four pillars of personal finance— banking, saving, budgeting, and investing—and the wealth-building ideas of personal entrepreneurship.

Amazon summary: The success stories speak for themselves in this book from money maestro Dave Ramsey. Instead of promising the normal dose of quick fixes, Ramsey offers a bold, no-nonsense approach to money matters, providing not only the how-to but also a grounded and uplifting hope for getting out of debt and achieving total financial health. Ramsey debunks the many myths of money (exposing the dangers of cash advance, rent-to-own, debt consolidation) and attacks the illusions and downright deceptions of the American dream, which encourages nothing but overspending and massive amounts of debt. "Don't even consider keeping up with the Joneses," Ramsey declares in his typically candid style. "They're broke!" The Total Money Makeover isn't theory. It works every single time. It works because it is simple. It works because it gets to the heart of the money problems: you.

I gave the book The Elements of Investing by Charles Ellis and Burton Malkiel to my wife's cousin, who is a student in high school, earlier this year for her birthday. This book is geared towards the beginning investor and emphasizes saving and building wealth through passive investing. Because she is a high school student, I understand she may not heed the recommendations in the book at this time in her life. But I think there is great value in exposing young people to new ideas.

Amazon summary: A timeless, easy-to-read guide on life-long investment principles that can help any investor succeed. The Elements of Investing has a single-minded goal: to teach the principles of investing in the same pared-to-bone manner that Professor William Strunk Jr. once taught composition to students at Harvard, using his classic little book, The Elements of Style. With great daring, Ellis and Malkiel imagined their own Little Red Schoolhouse course in investing for every investor around the world-and then penned this book. The Elements of Investing hacks away at all the overtrading and over thinking so predominant in the hyperactive thought patterns of the average investor. Malkiel and Ellis offer investors a set of simple but powerful thoughts on how to challenge Mr. Market at his own game, and win by not losing. All the need-to-know rules and investment principles can be found here.

November 28, 2010

A few weeks ago I spoke at a church luncheon. The topic was "money myths" and focused on several statements that most people consider to be true about money -- but are actually false. One of the sections dealt with giving away money and that many people believe that if you give away a certain amount, you are less wealthy by that amount. In other words, if I donate $100 to a charity, I'm worse off financially by $100.

“My conclusion was, sure enough, that when people get richer, they tend to give more money away. But I also came up with the following counterintuitive finding—that when people give more money away, they tend to prosper.”

“Specifically, here’s what I found: Say you have two identical families—same religion, same race, same number of kids, same town, same level of education—everything’s the same, except that one family gives $100 more to charity than the second family. Then the giving family will earn on average $375 more in income than the non-giving family—and that’s statistically attributable to the gift.”

So, if you give $100 you're not worse off by $100. You're actually better off by $375.

Think of the implications of this at growing levels of giving. For instance:

“Giving to charitable causes and wealth are complements, not substitutes, as logic might seem to dictate. Two groups of high-income producers were studied. Both groups were statistically identical in terms of income and age. The first group contained those who gave at least 10 percent of their annual realized income to charitable causes each year. The second group gave 1 percent or less. In terms of average dollar amounts [of net worth generated], the first group significantly outpaced the second [by about 20 to 1].”

So now it's "give away $100 and get back $2,000"? Cool!

Not surprisingly, the Bible makes similar claims in various books. Here are a few that line up with what we've discussed today:

One man gives freely, yet gains even more; another withholds unduly, but comes to poverty. A generous man will prosper; he who refreshes others will himself be refreshed. Proverbs 11:24-25

Have a plan. Make a list before you leave home. Use the supermarket flyer from your mailbox or the store’s website to take advantage of weekly sales. But read it carefully. Don’t assume that every featured product is on sale. Manufacturers might have paid for placement.

Get with the program. You usually have to sign up for a club card to get advertised sale prices.

Pace your purchases. You rarely have to pay full price for the staples you buy again and again. Products go on sale at predictable intervals that are easy to figure out if you read your store’s flyer every week.

Buy store brands. Most supermarkets offer their own private-label brands, which cost around 25 percent less than comparable big-name brands. We found that savings can be more than 50 percent.

Clip and click coupons.

Shop smarter. Stores use a variety of tactics to coax you into spending more.

Not much new here, but there are some good reminders -- just in case you're not doing all of these already.

I've written a ton on this subject. Here are the posts I've done this year alone (along with a couple others I though you would like) on saving on grocery/food costs:

November 26, 2010

While much of the US today is thinking about shopping, I'd like to change course and ask FMF readers to consider thinking about giving. We all know it's been a rough couple of years for many people financially, and whatever you can do this holiday season to help others will certainly make a difference for them. And even if you have been hit by the economy, it's still good to have some perspective -- you're doing much better than most of the world.

For our part, my family is making a contribution to Samaritan's Purse's 2010 Gift Catalog. For the third (or maybe fourth) year in a row, we gave each member of our family a couple hundred dollars and allowed them to "shop" the catalog, selecting items that they wanted to "buy" to help someone in need. Big on our list this year was (there were several other categories, but these are where the majority of our dollars went):

Stocking a fish pond

Helping a family grow a bountiful crop

Rescuing children from exploitation

Buying household water filters

Providing bikes and vehicles

I'd like to challenge you all to consider how you might be able to help out others. Whether it's with a donation of your money or your time, I'm sure it will be appreciated and be a blessing to those receiving it.

Let's start off with a reminder: FMF is on Facebook. Every weekday I post a couple pieces that usually aren't on FMF. It's a great way to connect and get some extra money advice/news if you're on Facebook quite often.

Here are some pieces I found especially worthwhile and some of the carnivals Free Money Finance was in this week and my posts that were included:

This promotion is valid from November 26th (Black Friday) through November 30th (Cyber Monday).

I don't have any extra details, so you may want to call Chase (the number is usually on the back of the card) to validate this offer/get the details. If you have the card and plan to shop at any of the retailers above, it will be a great way to earn some extra cash back.

Just want to wish you and your family a blessed and very happy Thanksgiving. May we all take a break from talking about money and focus on the things that really make us thankful. Here's my list -- still the same after two years (except maybe the KFC part.) ;-)

November 24, 2010

The box of books giveaways through my giveaway newsletter have been very popular, so below I'm detailing another set of them that will be up for grabs this month (if you want a chance to win, be sure to sign up for my newsletter here.) For now, here are the books I've received from publishers and a bit about them (from Amazon):

Generation Earn: The Young Professional's Guide to Spending, Investing, and Giving Back - As a young professional today, you are part of a generation with greater earning power and more advanced degrees than preceding ones—along with a fresh, holistic outlook on financial success. Yes, you might have taken out more debt than previous generations, but that doesn’t mean you’re a slacker living off credit cards and takeout as media pundits would have people believe. Kimberly Palmer, the Alpha Consumer columnist for US News & World Report, frequently receives questions from twenty-, thirty-, and forty-something readers like you about making smart, sustainable life choices. In Generation Earn, Palmer answers these questions—and many more.

Wrong: Why experts* keep failing us--and how to know when not to trust them *Scientists, finance wizards, doctors, relationship gurus, celebrity CEOs, ... consultants, health officials and more - Our investments are devastated, obesity is epidemic, test scores are in decline, blue-chip companies circle the drain, and popular medications turn out to be ineffective and even dangerous. What happened? Didn't we listen to the scientists, economists and other experts who promised us that if we followed their advice all would be well? Actually, those experts are a big reason we're in this mess. And, according to acclaimed business and science writer David H. Freedman, such expert counsel usually turns out to be wrong--often wildly so. Wrong reveals the dangerously distorted ways experts come up with their advice, and why the most heavily flawed conclusions end up getting the most attention-all the more so in the online era. But there's hope: Wrong spells out the means by which every individual and organization can do a better job of unearthing the crucial bits of right within a vast avalanche of misleading pronouncements.

Control Your Cash: Making Money Make Sense - "Control Your Cash: Making Money Make Sense" deconstructs personal finance so that everyone but the hopelessly inept can understand it. Inside the book, you'll learn: • how to get your bank accounts, credit cards and other financial instruments to work for you, and not the other way around • the right way to buy a car (i.e. with the salesman cursing your name as you drive away) • where and how to invest, and what all those symbols, charts and graphs mean • how to turn expenses into income, and stop living paycheck-to-paycheck • whom the tax system is stacked against (hint: it's most of us) and how to use that to your advantage • the very key to wealth itself. In fact, the authors thought it was so important they put it on the cover so you can read it even if you're too cheap to buy the book: Buy assets, sell liabilities. Finally, a book that explains personal finance not only in layman's terms, but in detail. If you can read, and have any capacity for self-discipline, invest a few bucks in "Control Your Cash" now and reap big financial rewards for the rest of your life.

My Mind Is Not Always My Friend: A Guide for How to Not Get in Your Own Way - Your computer and your cell phone know what day it is. So why should your mind be living in the past? The greatest challenge we face is to rule our minds, lest they rule us without our even being aware of it. How do you become a conscious observer of your thoughts and stop past-based, self-defeating thinking from controlling your present? How do you make your mind your ally, your servant, and your best friend? Your mind is one of the most powerful tools you possess. Now you ll learn now to create the emotional life, the spiritual freedom, and the financial success you ve always longed for.

Creating Your Own Destiny: How to Get Exactly What You Want Out of Life and Work - Put your own fate exactly where it belongs-in your hands. It is one of the great questions of life. Its a simple question, really, but it seems impossible for many to answer: Do we control our own destinies? 90 percent of people think and act as if their destiny is foreordained, while only about 10 percent believe in the capacity to change and act on it. Creating Your Own Destiny explains and demonstrates to the majority how to dream, plan, and execute a better future-despite the challenges of the economy and life circumstances.

The Skinny on the Art of Persuasion: How to Move Minds - Persuasion: to convince... to cause to do. From the French suadere, to urge. Great persuaders - people who can get into your brain and massage your cerebrum - wow. I mean what is more powerful than that? The Skinny On has studied great persuaders going back hundreds of years. And we have learned that persuasiveness is an acquired skill... that there are principles, techniques and strategies that you can develop to boost your persuasive powers. The Skinny on the Art of Persuasion is about developing the skills to move minds. In this graphic, one-hour read you'll learn how to influence the thinking of others. You'll learn skills to increase your persuasiveness and eventually, your success at whatever endeavor you pursue.

Three Cups - No product description -- here's a review for the book from Amazon: This is a great little book, a real treasure. The aim is to introduce to children a way of life that is creative, kind, thoughtful, simple and beneficial to all. Not only is it instructive to children but it is also a useful concept for adults, especially in these economically distressed times. The illustrations are beautiful as only April can do. I think this is a great new baby gift, shower gift, birthday gift or just an "I love you" gift. And think of the memories you would make taking your own child upon your knee and reading and talking to him/her about the beauty of living this way. This book will be a classic!

Cable companies have been losing TV subscribers at an ever faster rate in the last few months, and satellite TV isn't picking up the slack.

That could be a sign that Internet TV services such as Netflix and Hulu are finally starting to entice people to cancel cable, though company executives are pointing to the weak economy and housing market for now.

And they add this theory -- that people are "cutting the cable cord" similar to what has happened with phones:

A few weeks ago, the CEO of phone company Verizon Communications Inc. likened cord-cutting to what started happening to the local-phone companies five or six years ago, when people started giving up their landlines in favor of relying solely on their cell phones.

Comcast Corp. reported last week that its subscriber loss more than doubled in the third quarter, to 275,000. Comcast said many of those leaving had taken advantage of low introductory rates that the company offered last year when the analog TV broadcast network as shut down.

Ha! As I said, competition is a beautiful thing. Maybe now cable companies will realize that they need to cover the basics of good business practices -- reasonable prices, good customer service, and the like -- if they hope to stay in business. Personally, I don't think that will happen (old habits die hard) but I'd like it if it did.

I have an annual contract with Comcast that expires next August, so there's a lot of time until I'm up for renewal. Perhaps Comcast will lower prices/add services during that time that make me want to remain with them. Or perhaps online programming will grow (which I think it will) to the point where I can even get the soccer games I love so much via the web. Time will tell.

Have any of you recently cut out cable in favor of the web? I know many have gone to antennas, but what about online programming? And what are the pros and cons (cost, programs available, etc.) of doing so?

The following is a guest post by Michael A. Gayed, CFA, Chief Investment Strategist, Pension Partners, LLC. We've discussed this line of thinking previously, but I think it's good every now and then to re-stir the pot. ;-)

The post titled Market Timing Doesn't Work. Yes, It Does. No, It Doesn't. Yes, It Does addresses conflicting opinions about the validity of market timing. The big question, however, is WHY it does or doesn't work. To answer this, let's take a look at some actual hard facts about the nature of equity price movements by taking a look at the S&P 500 ETF (Symbol: SPY). Take a look at the chart below (click to enlarge):

What I did here was download the daily price data for the SPY ETF since inception (1993), ranked the daily returns, and came up with different returns patterns based on whether you were in the market in the best or worst performing days. The blue line represents a simple buy and hold strategy (with no market timing). The red line represents what the return would have been if you had timed the market and happened to have missed the 10 best days of performance. The yellow line is the return you would have seen if you had timed the market so perfectly that you were not exposed to the 10 worst days. Finally, the green line shows what would have happened if you had missed the 10 best and 10 worst days of performance.

Here's how the performance ends up:

Growth of $100,000 from 1/29/1993-8/30/2010

Buy and Hold: $324,330.15

10 Best Days Removed: $156,354.12

10 Worst Days Removed: $692,693.90

The difference in performance is enormous. We're talking about timing just 0.2% of the days in the sample period. Think about this for a moment: 10 days account for most of the return! Market timing becomes extremely difficult because the odds are against you – you have to be in the market's best performing days, and out of the market's worst performing ones.

But what is the risk? I argue that the risk is NOT the yellow 10 worst days removed line, i.e., not in outperforming, but in missing the best days. The truth is buy and hold appears to work in an almost lottery type fashion—you have to be in it to win it for those low probability, high impact (Black Swan-ish) days for the compounding effect to really make a difference cumulatively.

What's the takeaway for you?

Recognize that equity price pops and drops are largely unpredictable, yet account for most of the cumulative return

Don't over-trade and try to pick up pennies in front of a steamroller since performance is driven by the rare $100 bill trades (10 best days)

It’s okay to vary your exposure to equities, but do so with a broader asset allocation plan in mind

Being contrarian is a lot easier said than done—be honest with yourself in terms of what can and can not be accomplished through active trading.

Here's what's interesting to me about these: There are many different strategies and many different metrics, yet they are all doing well as investors (some REALLY well.) So there must be many roads to investing success, huh? Either that, or these ten are really, really, really good guessers. ;-)

How about you? For those of you who buy your own stocks, what are your investment strategies and key metrics? Do you mirror any of the WBNDs listed here?

Palatial home next door to Lee Ann Rimes house on King Richard’s Court in the Cool Springs Franklin area.

For the year 2010, the land market value is $750,000 and the improvement value is $4,159,200 for a combined total market appraisal of $4,909,200.

With Dave Ramsey’s home having a total tax appraisal roughly double that of Lee Ann Rimes next door, we estimate the retail value of Dave’s house to be around $9-$10 million.

A mortgage does not appear to have been recorded for the property.

The tax record shows 3 levels in Dave Ramsey‘s Cool Springs home, totaling 13,307 square feet of living area and 1,454 square feet of garage.

We checked with Middle Tennessee Electric and for the last 12 months, the average monthly electric bill at Dave Ramsey’s house was $1,285 per month.

As you might imagine, I have several thoughts on this one:

I used to live in Franklin, Tennessee near Cool Springs and it's a beautiful area.

$9-$10 million? Paid for in cash? Cha-ching!!!!! He's the man!!!

He obviously practices what he preaches (no debt at all.)

I always wonder why someone would need 13,000 square feet in a home. Maybe he's going to have 40 people move in with him?

His monthly electric bill is close to my annual electric bill.

I have absolutely zero problem with Dave spending a fortune on an over-the-top house. It's similar to me buying new cars IMO: he can afford it, he has all his finances in order, so why not? Good for him!!!!

Of course there is an interesting biblical question here -- should he spend like that when there are so many other (needy) people that are suffering? But I'll leave that debate for a future Sunday post. ;-)

You know that one of Dave's signature lines is that, "If you live like no one else, someday, you'll be able to live like no one else." (In other words, if you save, keep debt free, and manage your money correctly -- things that most people do not do -- you'll someday be able to buy/do/afford almost whatever you want -- things that most people can not do.) Looks like he's living out that phrase!!!!

Yahoo suggests how we all can retire early (which in this case is defined by them as before 50.) I'll save you most of the details and just give you their keys to doing this:

Save radically (and I mean radically)

Spend smartly (just a subset of saving radically IMO, but they have it listed separately.)

Invest well

In addition to these general guidelines, they offer the following suggestions:

Invest the Maximum Amount into Company-Sponsored Retirement Plans

Put Your Money in Long-Term, Low-Risk Investments

Avoid the Coasts -- Find a way to have an urban income with a suburban cost of living.

I have several thoughts on this issue:

Do you really want to scrimp and save for 30 years so you can eek out an early retirement? I didn't think so. Neither do I. As such, I think they need to add a recommendation to grow your career as part of this process. Doing this will allow you to earn (and thus save) much more during your working career and allow you a bit more leeway in what you buy/spend before you get to 50 (which will make life more enjoyable IMO) as well as help you build a bigger nest egg for retirement.

If I had a "guide to retiring at 50" it would probably be the same as the basic principles that make you wealthy over time -- with the focus on generating even more income, controlling spending even tighter, and more savings/investing added in.

I'm not sure retiring at 50 is a reasonable goal for most people. Yes, some can do it, but it requires a decent income and a real dedication to save in 30 years enough to live for potentially another 30 or 40 years. IMO, early semi-retirement is a much option for most people -- and can be done MUCH earlier than 50.

November 22, 2010

My husband is 26, I am 28. He's working full time as a systems engineer and makes about 50,000. Meanwhile, he is also attending online college and expecting to graduate in May, 2011. I don't work. We live in Fresno, CA where the cost of living is not too high. He contributes $350 to a 401K and $200 to HSA before tax monthly. He takes home about 3,300. We don't have any debt except his student loan of 17K (it's the subsidized student loan and won't need to be paid until 11/2011 -- we plan to pay it off at once). For a little over a year now we have been living in the studio apartment offered by a his grandpa where rent and utilities are free. That allows us to save around 2,200 out of his take home pay each month.Right now we've saved 15K, and continue to put 2,200 in our savings every month. Our question is, he is thinking about attending online graduate school, and we are also thinking about buying a house, but can we do both at the same time? My husband really wants to attend graduate school right after college, and it seems like if we don't buy a house sometime next year, the interest rates and the house price are going to go up. The total cost is around $32K for graduate school (Boston University online). We plan on buying a house for around 90-100K with 20% down payment,15 year loan.Here are two options:

a) We keep staying at the apartment grandpa offered, he attends online graduate school (pay cash), and we continue to save money and wait on the house hunting. At the end of 2013, we will have 41K in our savings (doesn't include 401K,HSA), be debt free, but have no house.b) We buy a house around October 2011 and he starts graduate school in September. Our monthly savings decreases to around 1,150, and we have to pay $3100 for tuition every other month till May 2013. When he graduates, there will be 9,000 left in our savings, and we'll start to make payments on the 17K student loan. Once it's paid off, we'll pay double on our house payment. And the house should be paid off in 2018.All those numbers above are predicted with his current salary and our current situation. He gets raises every year. Also, he continues to contribute to the 401K with employer's match. We plan to open an IRA soon too. So, do you think we can do all these at once? The only thing that concerns me is what if he loses his job? The unemployment benefits he would get will be $1,800 ($1,500 after tax) a month, and that should be able to cover our mortage payments and living expenses without touching our savings. Though he will have to drop off graduate school till he finds a job again.

How 10 ordinary people consistently achieve extraordinary returns on their investments (and how you can, too).

There are the famous investors whose names you know—Buffett, Bogle, Soros, Lynch, and Templeton. And then there are the Warren Buffetts next door, those successful investors you've never heard of—Rees, Krebs, Koza, Petainen, and Weyland. The Warren Buffetts Next Door describes how these "regular" people—tractor-trailer drivers, radio DJs, and college dropouts—utilize an armament of online information, tools, and resources to routinely outperform professional brokers and Wall Street's Ivy League–educated investors.

So, the author found 10 "average Joes" who are investing geniuses and he profiles each of them -- telling their investment strategies, key metrics, performance stats, etc.

I love the fact that the book tells real-life stories of investors who are earning outstanding returns. It's a fascinating read -- and actually makes investing fun/interesting! ;-)

What I don't like is the implication (in some cases) or outright claims (in other cases) that because these 10 guys can do so well, so can anyone else (including you). If all it takes to "prove" something is to find 10 people who have done it, I can "prove" a lot of things that aren't actually true. And lest we forget, the Millionaires Next Door (where this book gets part of its title) was based on research, not on a very small sample of 10 people. Maybe it's true and maybe it isn't (I don't think it is) that anyone (or even most people) can become excellent investors, but please don't insult my intelligence by claiming that because 10 people can do something that anyone can.

Here's an example of what I'm talking about. It's the last paragraph of the book's introduction:

My hope is that you will read about my 10 Warren Buffetts Next Door and realize that the only real prerequisite to becoming a good investor is committing the time to do so. In other words, invest in yourself. You can achieve great investment returns, meet your financial goals, and beat the professional investors you would otherwise entrust your capital to.

Really? Is time (to educate yourself) the only requirement? If that was true, wouldn't the "professional investors" that the book claims everyone can beat be the best investors of all? After all, they have spent years (or even decades) trying to be better investors. And they have the added advantage of huge financial resources, staffs to help make/execute decisions, and so on. So simply by taking the time to learn about investing I can outperform them? Hmmm.

We have our own Warren Buffett Next Door who reads FMF. If you recall, I shared some of his thoughts on investing earlier this year. The summary: People can be excellent investors but the time, experience, and personality traits that are required to do so are held by very few. In other words, only a small percentage of people can hope to achieve stellar returns. For the vast majority, even investing the time (which is substantial) to be a great investor is not even close to guaranteeing a successful performance.

The book is balanced out a bit in the foreword written by Steve Forbes. Here's what he says about it:

The book both inspires and cautions. As always, there are no quick, easy roads to riches. But now people have unprecedented opportunities to create meaningful wealth over time -- if they have the stick-to-itiveness and the maturity to know there will be plenty of bumps along the way.

Forbes also gives a great summary of what can be learned from these ten investors. His thoughts:

There is no one way to achieve success. Each of these people has developed his own particular approach.

They do share two characteristics: hard work and iron discipline.

These next-door Buffetts make mistakes -- but they actually learn from them.

Every one of them has suffered a searing market setback.

What also becomes clear here is how the Web allows individuals, regardless of their circumstances, to develop talents that otherwise would have lain dormant.

This is something I can believe. In particular, the "iron discipline" requirement alone will eliminate most wannabe Buffetts -- because when they start losing real money, especially their own real money, most people's "iron discipline" melts like wax in a hot flame.

All this said, I did enjoy the book and would recommend it to those of you who pick your own stocks (or those who want to.) Reading how these ten investors use their individual strategies to significantly outperform the market (and most of the rest of the world) is really quite compelling. Even if you don't learn anything that you will apply yourself, you'll still get an enjoyable read out of this book.

Tomorrow I'll share highlights about the ten investors so you can see for yourself the diverse ways these people became Warren Buffetts next door.

The old financial rule-of-thumb is that it's always cheaper to buy a used car than a new car (the primary reason being that an old car has rid itself of depreciation expenses while the new car will drop in value like a rock the first few years it's on the road.) We debated and discussed this issue recently in my posts titled My Recent New Car Purchase and Why I Buy New Cars and most readers agreed -- used cars are less expensive.

Do you think buying a used car will keep your monthly auto payment down? In a rare reversal, you now could pay less for a new one.

With the price of used cars at a 15-year high, many buyers may be better off buying new.

Values for late-model used cars and trucks—especially trucks and SUVs—have jumped during the past year to the point that in some cases, the monthly payment on a one-year-old vehicle could cost you more than a new one.

The article doesn't make a great case for the fact that used cars cost more than new (there are a lot of words like "maybe" and "potentially" thrown in the piece), but its information does strongly suggest and support findings that are almost as compelling: the difference in cost between a new and used car is shrinking, the gap is nowhere near what it used to be, and it's likely that the difference is minimal in many cases (especially, as they note, in trucks and SUVs).

These findings match what several FMF readers have found (going by the comments on my two posts linked above.) It also is in line with the resale value of the 109,000-mile, six-year-old Subaru Forester that I sold when I bought my new car. I was amazed/surprised at what those vehicles were going for.

That said, I'm not attempting to justify my purchase as a less-expensive option than buying used (we've been through that discussion.) And I still think that buying used is probably almost always a more cost-effective option. But after reading this piece, I do believe that the gap between buying new and used cars is less than I thought it was and likely less than most people believe.

November 21, 2010

Here's a perfect freebie for a Sunday post -- an e-book on debt and bankruptcy from Crown Ministries. If you want your free copy (for you or for someone you know), simply go to this page to download your free book.

A few weeks ago I spoke at a church luncheon. The topic was "money myths" and focused on several statements that most people consider to be true about money -- but are actually false.

One thing I shared was the fact that most people assume that if someone drives an expensive car or lives in a million-dollar house, then they are wealthy. According to the facts, this is not true (for details, see Cars Driven by Millionaires (And Me) and Why Many Homeowners are Having a Tough Time.) It's not true because most people who spend a lot on homes and cars are more likely to be spending most of their incomes in an attempt to "keep up with the Joneses." And since they are spending most (or all) of their incomes, they don't have much (or any) left over to grow their net worths.

On the other had, most millionaires live "common", quiet, less showy lives. They don't worry as much about appearances so they don't feel compelled to spend money to look wealthy. This, in turn, helps them do something very important: spend less than they earn. As a result, they become wealthy.

Interestingly, the Bible addresses the issue of showy people not having wealth and non-showy people having it several times in various verses. Here are a few of my favorites:

One man pretends to be rich, yet has nothing; another pretends to be poor, yet has great wealth. Proverbs 13:7

Better to be a nobody and yet have a servant than pretend to be somebody and have no food. Proverbs 12:9

As goods increase, so do those who consume them. And what benefit are they to the owner except to feast his eyes on them? Ecclesiastes 5:11

In addition to cutting costs, they also increased income by taking side jobs and selling stuff they owned (even big items like cars). By doing all of these things, they eliminated fairly good amounts of debt in a relatively short period of time. Good for them!

Getting out of debt really boils down to two simple steps:

Create as much cushion between what you make and what you spend by increasing income, decreasing spending, or both.

Use this cushion to pay down your debts.

But there's a hidden element of paying off debt that is vital to the process and is rarely mentioned in pieces on "how to get out of debt" (I think it's kind of assumed.) What is it? D-E-T-E-R-M-I-N-A-T-I-O-N.

Yep, determination. Without it, you'll never get out of debt. With it, eliminating your debt is simply a matter of time -- just like it was for the five people listed above.

November 19, 2010

MarketWatch tells us that 57% of holiday shoppers will be making non-gift purchases for themselves this year with the average personal expenditure being $107.50. Ha!

I must admit that my personal list is getting quite healthy. I guess it's because I'm shopping more -- both online and in stores -- and I'm seeing things that are new/I like. And based on what I'm seeing, I'm surprised the amount is only $107! ;-)

1. Champagne and Fine Wine. Bottles of bubbly and fine wine usually go on sale around the holidays and the prices get slashed even further the weeks that follow.

2. Baking Ingredients

3. Electronics. In January companies roll out all their new models of computers, cameras, cell phones, printers … you name it. While early adapters salivate over the newest and latest tech gadgets, January is a great time for everyone else to buy the most recent models - which will, no doubt, be discounted heavily to make room for the new.

4. Winter Clothes & Accessories

5. Refurbished Goods. Expect stores’ “refurbished” bins - where returned appliances and gadgets get a 10 to 20% discount - to be well-stocked after the holidays, as people return unwanted gifts.

6. Holiday Cards, Wrapping Paper, Ornaments

7. Calendars.

Here's my take on these:

1. I don't drink champagne and fine wine, so I have no issue on this one.

2. Baking ingredients? Really? Aren't these items regularly on sale throughout the year?

3. I've been looking for a computer for some time now and I know what I want. If I find it at what I think is a "good" price, I'm going to buy it. Could I save maybe $50 by waiting until January? Maybe. Then again, maybe retailers will be sold out of the computer I'm looking for and I'll get nothing (or have to settle). I'd rather get what I want at a "good" price.

4. We regularly buy items after the season is over and use them for the next year. Then again, winter in Michigan is eight months long, so we make these purchases in July. (Ok, I'm joking, but winter does last through March for sure and usually into April.)

5. I've never purchased refurbished. Personally I'd rather pay more and get something new. Am I wasting money doing this?

6. See comments on #4 -- same thing.

7. We have a paper calendar in our kitchen and my wife carries a small one in her purse. Everything else is electronic.

How about you? See anything here you can/should wait on? Or maybe something on the list that you will NOT wait to buy?

November 18, 2010

In today’s social and political environment harping on “the rich” seems like a daily sport. Never mind that most of the pundits and commentators lambasting “the rich” are themselves among the highest rich in the country by anyone’s definition! But let us not digress…

As it stands, at the time of writing this the commonly accepted and PC way of definition “the rich” are those with incomes of $250,000 or more. (In some conversation that number is reduced to $200k, $150k, $125k, and even $85,000(!).) It is unclear to MasterPo how or why such a line in the proverbial sand is used (and certainly not clear how or why such persons are now considered public enemy #1!) but that seems to be the standard of the day so let’s work with that figure.

The question is: As time marches on will $250,000 still be considered “rich” after applying years even decades of inflation erosion on purchasing power?

MasterPo normally doesn’t like to resort to number crunching models to make a point. But math is absolute and unquestionable. And a subject like this requires clear illustrations.

The time value of money should be SOP to all investors. As such the basic compound growth formula should also be so basic to all investor as to be able to do the math in yourself:

T = P(1+i)^t

Where “P” is the starting amount (principle), “I” is the rate of growth (annualized), “t” is the number of periods in years, and “T” is the final total after compounding. It’s just basic high school algebra.

Now let’s apply this to the thesis of “the rich”, time, and a real world example.

According to the National Association of Colleges and Employers (as reported by the U.S. Bureau of Labor Statistics) the average starting salary for a college graduate with a Bachelor’s degree in Computer Science is $61.407 as of July 2009 (latest statistics available as of writing this).

So if we presume a mere 3% annual inflation, applying the above formula, then someone born today and graduating college at age 20 would need a starting salary of $111,000 (rounded) to be equal to today’s starting salary.

Let us go further and presume someone graduating 20 years from now and starting with $111,000 salary works for 10 years and receives an annual raise of just 3%, also matching inflation only. At the end of 10 years that person will be making $150,000 (rounded).

That’s pretty darn close to the magical $200,000 mark knocking on the doors of “the rich”.

Take it one step further: Let us now presume this person meets someone else of similar career background, one thing leads to another, and it’s wedding bells time. Now you have a married couple each making $150,000, or now $300,000 combined income – well over the $250,000 “rich” mark!

And if we presume 4% annual inflation then the numbers become $135k, $199k, and $399k respectively in the scenario above.

Plus this does not take into consideration any massive jump in inflation or hyper inflation. Just one year of 10% inflation throws these figures even higher!

MasterPo knows some critics of scenario will try to make the argument that by that time government will have adjusted tax brackets and various other thresholds to account for inflation adjustments. Can you really count on that? History proves that thresholds for determining “the rich” are coming down and not going up! (MasterPo won’t even go into a discussion of misleading if not outright false inflation calculations.)

Too many people today, either by short sightedness or sheer class envy, just don’t think about policy ramifications on income levels higher than their own. Not really much of a surprise as people are constantly being hounded that anyone who makes more then they must have stolen it somehow. But as this illustration shows just the power of inflation, as low as it may be, can and will rise people will into levels of “the rich” without actually being “rich”.

It’s always amusing to blame your woes on someone who has more than you. But sit back, relax, have a beer and play some Xbox. You don’t have to worry. You will never be “rich” – or will you?

I have a question regarding attending seminars or classes on handling money. Is it worth the money spent to go through Dave Ramsey's Financial Peace University when there is so much free advice on radio programs, podcasts, websites, books, newsletters, etc on how to handle money? I have borrowed Dave's book The Total Money Makeover from the library and I listen to his podcast regularly. I also listen to Crown Ministry via the radio and read FMF almost daily. I am just curious to know if you think it is a good use of money when I think I have learned so much from free or low cost sources. Why would people pay for financial advise when the whole idea is to spend less, pay off debt, and build savings?

It is a lot easier to buy gold than to sell it—at least for a good price.

Some will give you as little as 10% of the meltdown value for gold jewelry and coins. Many jewelry stores, including Kay Jewelers, a unit of Signet Jewelers, pay about 50% of the meltdown value. Coin shops tend to pay more: up to 80%—assuming the coins don't have a higher collectible value—and a few online players may offer as much as 90%.

Let's make a few assumptions and see how this plays out:

Jimmy buys one ounce of gold (a few years ago -- I'm using round numbers, not today's prices, for ease of illustration) for $450. In addition, there are fees that bring his total costs to $500.

The price of gold doubles to $900.

Jimmy wants to cash in so he goes to a local coin shop and gets $720 (80% of market value).

So while the price of gold has gone up 100%, Jimmy's gain is only 44% ($720-$500)/$500.

This is not the formula for a winning investment IMO.

Sure, Jimmy could have done a few things better (like having lower buying costs and selling for more.) But even in an almost optimal situation where he incurs 1% costs of buying and gets 90% of market value for his gold, he still only makes 78%.

Yeah, making 78% is still good -- especially if it's within a year. Or two. Or three. Or even four. But doesn't it seem like the investment isn't all that it should be? He's losing 22% along the way! Or maybe I'm not looking at the situation correctly (he does, after all, still make a good return.) You tell me.

Or look at it this way. Under the original scenario of fees and 80% selling price, the price of gold needs to increase by 39% (from $450 to $625) just for Jimmy to BREAK EVEN!!!! Even with the second, more generous assumptions, the price of gold still needs to increase 12% for Jimmy to be in the black. This is simply crazy!!!!! What investment would you want to go into knowing that you had to make 12% to 39% just to get back to even? Answer: none. IMO, this is why gold stinks as an investment.

Now if you could sell gold easily and much closer to market value, then it would become a better investment. But it seems to me that the cards are stacked against all but the most sophisticated investors here, so only "experts" will get anything close to market value. Again, maybe I'm wrong. Those of you who know better can enlighten me if that's the case.

So until I'm convinced otherwise, gold is out for me as an investment. That said, there are other reasons for buying gold -- for the "insurance" factor. The following was noted in part 3 of my gold/silver interview:

The first allocation [of gold] should be under the mindset of never selling it. It is the “insurance” against dollar default.

To me, this seems like a valid reason to purchase gold -- if you believe in the total collapse of the economy/gold will hold it's value while inflation runs rampant theories. But for purely investment reasons, I don't see how gold represents anything but an investment that must increase in value SIGNIFICANTLY for you to earn anything resembling a reasonable return.

How can I say that? It's because I have a great example in the Tardy family (yes, that's their name). Here's their story (the last one in the linked to post):

A couple years ago, I decided I wanted to have a baby and quit my job. But there was a problem. My husband and I were in debt, and I made two-thirds of our household income. So I couldn't just quit.

I started out by sitting down and adding up all our debt -- which ended up being around $70,000. The first thing I thought was, 'Wow, we really need to start getting rid of this. We should sell our car right away.'

After some prodding, my husband got on board too. We sold his car and were able to immediately get rid of $19,000 of our total debt. After that, we knew we were totally doing this.

Craigslist and eBay became our best friends, and we sold everything from a kayak to a weight bench and a computer monitor.

My husband did some website design jobs on the side to make some extra money, and we printed out a budget each month so we knew exactly how much we could spend and what we would be spending it on.

We saved on gas costs by limiting the amount of driving we did, and we put ourselves on a grocery budget of $300 a month. On top of that, we cut out cable, lowered our phone bill as much as humanly possible and switched our car insurance twice in one year to find lower rates.

By the time I quit my job for good -- which was less than two years after I started the budget -- we had paid off $70,000 in debt and put $23,000 in the bank as an emergency fund.

So, the formula appears "simple":

Create as much cushion as possible between what you make and what you spend by increasing income and decreasing expenses.

Pay off the debt.

Sock away a good amount of savings.

Move to one income and keep your spending low.

That said, I'm pretty impressed by this couple. They had so much debt and she made two-thirds of their income -- and yet they were able to do so much in such a short period of time. Then again, I'm thinking their incomes had to be pretty high to pull this off. Perhaps she made $100k per year and he made $50k (or some similar set of numbers.) It's still a great accomplishment nonetheless -- but the (likely) higher incomes make it a bit less impressive.

The biggest thing was where my husband and I chose to live. We lived in a one-bedroom apartment long after we could afford to live in a two bedroom or three bedroom. We basically never upgraded our lives after school and just continued living like college students. . . . We also made sure to always live near public transportation so we only needed one car . . . and we make sure to cook relatively inexpensive nonmeat-focused meals most nights at home so our grocery bill is pretty low at about $120 a week. . . . Another big thing was we use old clunky cellphones that are definitely not glamorous but saved us money, and we skipped cable a couple years ago. . . . Just across the board, we tried to live more frugally than we could have actually afforded to. . . . It’s not like we denied ourselves everything. I think giving ourselves some small indulgences like a nice television made it easier to make the big sacrifices.

So, the key is keeping spending low -- especially on high-ticket items like homes and cars. Who would have ever guessed that? ;-)

It's interesting to note that they are no longer saving a third of their income. They have bought a more expensive house, have a child, have new expenses (like daycare), etc. But they are still saving 15% -- not a bad level at all. And since they are young, they certainly have time on their side -- several decades for the money saved to compound like crazy.

I've been saving a third of my salary for some time now, so I can agree with their basic premise -- live well below your means. Of course, it's much easier to live well below your means if you take my other bit of advice and grow your career/income to its potential. After all, it's easier to save 1/3 of $150,000 (still allowing you $100,000 to live on) than it is to save 1/3 of $50,000 (giving you only #33,333 to get by on), isn't it?

I didn't know maids received tips, so it took me weeks to realize that the coins left in rooms were an intentional gift. My tips were paltry: I almost never received more than $1, and at times guests left religious pamphlets. One day, however, I was shocked to find a crisp $100 bill lying on a table. Although the generous tip put a little spring in my step and compelled me to do a better job that day, it didn't change my work ethic for long. I apologize to you now if you ever stayed in one of my rooms. You deserved better. But if housekeepers were paid more than minimum wage—and the tips were a bit better—I might have cleaned your toilet rather than just flushed it.

If you are staying for one night at a hotel, tipping (as you leave -- which is when people usually leave money in the room) will have no impact on whether or not your room gets a better cleaning. You can certainly leave a tip for other reasons, but it won't help if you tip the morning after a stay as you leave.

If you are staying multiple nights, leaving a decent tip may get your room cleaned a bit better that day. Then again, it may not. ;-)

I used to not tip hotel housekeepers (assuming that their salaries/duties was something I was already paying for in my bill), but lately I have been leaving tips (usually a couple $1 gold dollars.) I figure that the economy has hit people pretty hard and those that clean hotel rooms are likely to be amongst the most impacted groups economically. So why not help them out a bit and leave a small tip? (FYI, I also leave a quick "thanks" note.)

So, do you tip your hotel housekeeper? Why or why not? And if you do, how much do you leave?

November 16, 2010

Last year I earned over $800 in cash back credit card rewards. That amount included some really big charges (like our new furnace) and some bonuses, so I don't think I'll be matching that number again this year (though I won't be far off.) I'll be sure to share the specifics of how I did sometime in January.

One thing that has hampered me a bit is that I've held on to my Blue Cash® from American Express card. I prefer a two-card, simple to execute strategy (versus a higher-rewarding though tougher to manage multi-card strategy). The "Schwab" Visa (in quotes since it's no longer associated with Schwab) 2% cash back card is my main credit card, and the Blue Cash Amex is my back-up. I keep it for three reasons:

I need an Amex to shop/get gas at Costco

I like having cards from different companies

It's a decent cash back card -- it was my mainstay for years.

Overall, I thing the Blue Cash® from American Express card is one of the top cash back credit cards out there. But it works well only if you charge a ton (over $20k) on it each year. Since it's my backup, I don't charge anything like that on it -- I just use it for purchases at Costco. And for this only, it's not a great option.

A better choice for me is the TrueEarnings® Card from Costco and American Express. This card offers 3% back on gasoline and restaurants, 2% back on travel, and 1% back on everything else (including at Costco). And you don't need to spend $20,000 to get the benefit from it -- it starts working at $1. So I intend to get one of these and use it for gas, travel, and Costco purchases, then use my 2% Visa for everything else (plus they're currently giving a $25 statement credit for the first purchase made with the Card.) I figure that doing this will add an extra $25 to $50 in cash back every year -- which is nothing to sneeze at for buying stuff I'd purchase anyway. ;-)

How about you? Anyone out there using the Costco Amex card? What do you think about it?

Mistake No. 1: Thinking the most important decision is how you invest your money. Your first priority should be determining how much you need to save—and figuring out how to make that happen.

Mistake No. 2: Investing only enough to get the company match. Save for your future and maximize the tax advantage of contributing to the plan.

Mistake No. 3: Assuming your 401(k) can be invested for you alone because it is for your retirement. At least once a year, you should put your investments and your spouse's together and make adjustments.

Mistake No. 4: Investing too much in your company's stock—even after Enron and Lehman Brothers. Vanguard recommends that your company stock shouldn't make up more than 10% of your retirement-plan money.

Mistake No. 5: Picking funds based on performance alone. Stock and bond returns are largely unpredictable. But the one factor that is predictable is the expense rate. When deciding which funds to invest in, zero in on the ones with the lowest expenses.

2. I've been putting in the maximum amount possible for over a decade now. Again, I've always wanted to save as much as possible as soon as possible. As far as not getting the match for some time (the article notes that some employer matches don't vest immediately), yes, I've had to deal with this in the past (though I've stayed around long enough to collect everything.) Thankfully, my current plan vests immediately.

3. I invest all of our funds -- retirement and non-retirement -- as if they are one big amount, allocating the dollars into types of assets I feel are appropriate for our family as a whole.

4. Back in the day, most 401ks put the match in company stock (it was a way to bump up the price -- automatic, regular purchases of stock.) I had a plan like this. But for the past 12 years I've worked for private companies that didn't have stock, so the entire match has gone into funds I selected (thankfully.) If your match goes into company stock, I think you'd be wise to follow Vanguard's advice and sell it as soon as you can so you have no more than 10% of your investments in your company's stock.

5. Ha! I think I'm on the same page as the author on this one. My 401k is with Fidelity, and I invest in their low-cost index funds (which have an even lower expense ratio since I have an amount invested with them above a certain threshold -- which qualifies me for lower costs.)

How about you? Any of these ring true for they way you manage your 401k?

Does anyone know what "lowest prices of the season" means? What season are they talking about? And will the prices get lower "next" season (or next week)? And just how low are the prices?

I'm referring to the ubiquitous phrase being used by many companies for the last year or two. In particular, retailers (Macy's, Sears, Kohl's, Kmart, etc.) regularly use "lowest prices of the season" in their flyers. But what does this really mean? It really doesn't say anything, does it? Or maybe I'm just missing the point...

I've studied and applied marketing principles for over 20 years now and to see one phrase used so often by so many different companies, I'm convinced of one thing: it works. In other words, that phrase motivates consumers to take action (buy stuff) at prices that generate acceptable profits for the companies. Not GREAT prices (necessarily). Not the BEST prices (necessarily). But at prices that certainly make sense for the retailers to keep using the words over and over and over -- and for them to spread from one retailer to another like some sort of marketing plague.

But as a consumer the phrase is vague and leaves much to the imagination. Perhaps that's why it's a success -- it makes consumers think "best deals" when it really offers "ok deals."

Anyone have any insights into this phrase, what it means, how it works, etc.? And is anyone seeing this phrase almost everywhere or am I the only one strange enough to notice such things?

November 15, 2010

A lot of people are taking on more responsibilities because companies have laid off people. Taking on more responsibility makes a person more valuable to the organization. And that’s why they can ask for a raise.

They then give some steps on how to ask for a raise:

The first step, most pros agree, is that you have to do your homework. Use a site like Payscale.com, Salary.com or Glassdoor.com to figure out what the salary range is for your profession so you have a reasonable ballpark of what to ask for heading into the meeting with your boss.

Plus, know where your company is financially.

Then, and this is a crucial step, do a self-evaluation. Make a list of what your job responsibilities are. Maybe you’re doing the work of two people after that last round of layoffs, or, like, Viscio, you’re doing the work of the next level up — without the pay.

Then make a list of all the reasons why they should pay you more. Are you bringing in more money or more clients than last year? Are you helping to cut costs? What they want to know now if they’re going to even think about paying you more is — How are you improving the company’s bottom line?

Here are my thoughts on this issue:

Potentially, anytime is a good time to ask for a raise. You just need to fit the criteria for getting one.

The criteria for getting a raise is making sure you deserve a raise (for details, see How to Demonstrate that You Deserve a Raise.) In short, you need to know what your employer expects from someone having your job and you need to be doing MORE than what is required (and doing it well.)

In addition, the more your accomplishments have to do with making or saving money for the company/organization, the better. These are usually more vital positions and if you're hitting home runs in them, you're a great candidate for a raise.

If you have met all of these AND your company is doing well financially, ask for a raise! It doesn't get any better than this.

If you have met all of these BUT your company is not doing well financially, you can still ask for a raise, but you'll just need to take a different tone (not as aggressive and stating that you know the company is in rough shape but that you are contributing a great deal, etc.)

Be prepared to hear "no." If you get a negative response, ask for an explanation. If it seems like a good reason, then see if there are other ways you can be compensated (extra time off, special company perks, working flex time, etc.)

If the response is "no, no, no" to everything and you're a really strong performer, then it's probably time to explore other job opportunities. It's apparent that you're not going to grow your career even though you're a star player.

If you're not a star player and/or have a position that's easily filled and/or a job that's not that important to the company, I have bad news for you -- it's unlikely that you'll get decent raises even in good times. You need to either change your performance and/or job or be content with the few (and small) raises that the organization gives you on its own. Perhaps you're happy with your job and this arrangement and if so, fine. But I don't have any answers for those of you who do not perform or have a meaningful job and still want to get good raises. Sorry.

I've actually written on the topic of how to ask for a raise several times. If you want more thoughts on this subject, check out these posts:

November 14, 2010

Whoever is kind to the poor lends to the LORD, and he will reward them for what they have done.

What's interesting to me is that if you are "kind to the poor" then there's a promise of a "reward" from God. But just what do these terms mean?

For instance, how can one be "kind to the poor"? Some ways I can think of:

Giving them some of your surplus to provide for their needs (food, clothing, shelter, etc.)

Volunteering to help them with tasks, childcare, etc. -- burdens that may be crushing them in what is already a tough lifestyle.

Being a friend to them and simply treating them as they should be treated. Giving them hope and encouragement in tough times.

Is this what the verse means when it says to be "kind to the poor" or is it referring to something else? What are your thoughts?

And what does "reward" mean? Does it mean earthly rewards (like money, better health, fewer problems, etc.) or some sort of heavenly reward? I'm interested in hearing what you think.

Personally, I believe that any of the ways above (and more) where you are helping the poor is something that will come back to you as a blessing in one form or fashion. In particular, I think it's most likely that you get back what you give (if you reap, you will sow -- see 2 Corinthians 9:6) -- if you give money, you get money back. If you give friendship, you get friendship back. If you give kindness, you get kindness back (and so on).

We've been allocating an ever-growing portion of our annual giving towards helping the poor -- specifically to feeding the poor. I think the economy has been especially hard on these people (since many others are just trying to stay afloat themselves, they don't have the time and resources to help the poor), so we've been trying to pick up the slack a bit.

November 13, 2010

Congratulations. You are just about ready to buy a diamond. Perhaps you have finally proposed to your girlfriend, or maybe it is an anniversary gift for your wife of many years.

Buying a diamond is an expensive proposition. For this little thing you are going to pay hundreds, or more likely thousands, of dollars. Even worse is you look at the diamond and you have no idea what you are looking at – if it is what the salesman told you it is, if the issues the salesman pointed out are really the important ones and what did he “forget” to mention about the diamond, what to look at to know if the diamond you bought is worth the money. So not only is it an expensive proposition, but it is also a frightening proposition.

There are really two aspects of buying diamonds by which you can save yourself a nice amount of money. One of those is where you buy your diamond, and the second is what features of the diamond you concentrate on.

Where To Buy

The first question is where you should buy your diamond. The old fashioned way would have you going into the shop of a local jeweler and having him tell you which diamond to buy, since they all look the same to you. Nowadays though, there is another, a better, option.

The better option is buying your diamond online. There are numerous benefits to buying diamonds online, while there is only one benefit to buying the diamond in a bricks and mortar jewelry store.

If you are buying the diamond in a bricks and mortar store, you have the obvious benefit of being able to see the diamond before you buy it. You get to hold it in your hand and inspect it to the best of your ability. You can look at it under the lighting, and lay it up against a couple rings and get a good idea of what it might look like on your wife’s finger.

The drawback of this is that even though you get to hold and look at the actual diamond before you buy it, if you are like most people you probably have no idea what you are looking at and how to evaluate the worth of the diamond in your hand. And you will be paying 20%-30% more by buying it from the jeweler just for that advantage of getting to see it.

B&M stores have a lot of overhead. They have to pay rent, they have to stock an expensive inventory, they have general overhead such as salaries, electricity, water, and the like, and all that gets added to the sales price of every item they sell.

When you buy diamonds online you are really harnessing the power of the internet. The major benefits you achieve in this are the amazing savings you will enjoy, along with the vast inventory available to you.

There are a number of benefits to buying diamonds online, though the most important benefit is the savings. The financial savings is the issue that most people care about the most. Because online diamond merchants have no overhead, or very little overhead, they are able to offer their diamonds for sale at much lower prices.

The lack of overhead allows the diamonds to be priced lower. This will give you savings usually in the range of 20%-30% and sometimes even more!

Is the ability to look at a diamond, even though you probably don’t know what you are looking at, worth 25% more? Think of it like this – if you were buying something for $10, you might be willing to pay $12 just to have that slight extra confidence because you got to hold it first. When you are buying a diamond that is worth $5000, $10,000 or even more, the difference is going to be in the hundreds, or thousands, of dollars. All that extra money being saved by buying the diamond online can either be saved and pocketed, or it can be used to buy a diamond of even better quality than originally planned.

Quality

The second issue is the quality of the diamond you buy. Much of the diamond industry is built upon the successful marketing campaign of the DeBeers syndicate. The average person can’t tell the difference from one diamond to the next.

There are many features to consider when buying the diamond. The main qualities include Color and Clarity – two of “the Four Cs”. There is a wide range of color, starting from color D and moving down to Color J. D is considered colorless, and then the range moves at different levels down to J. Beyond J is already called fancy color stones.

The thing is, unless you are a trained diamond dealer, most people cannot tell the difference between a G color and a F color diamond. Or between a diamond rated an E and between a diamond rated at F.

In clarity as well, the range begins with IF (internally flawless) and I2/3 (Included). Again, to be brief, most people cannot tell the difference between a VS1 diamond and a VS2 diamond, or between a VS2 and a SI1 diamond.

There are definitely qualities of the diamond that you are not appreciating, but are paying a lot of money for. If you buy a diamond rated at VVS2, you are paying hundreds of dollars more for a level of quality that you see no benefit from. You can save a few hundred dollars, and buy a VS1 diamond instead and still have a beautiful diamond that to your eye looks just as nice as the higher quality diamond.

The above is just an example, but my point is that there are many aspects of the diamond that give you plenty of room to maneuver and allow you to save money.

That said, I like living where I live now as well. And it's an even more affordable city to live in. ;-)

I have good friends who live in Texas and they told me that for the most part, Texas has sat out of much of the recession problems that have plagued the rest of the US for a couple years. Those of you who live in Texas: true or not true?

Personally, I could probably live in any of the cities on this list, tough I don't know much about Buffalo (except that it snows a lot there) or Rochester. Any thoughts on these two?

Let's start off with a reminder: FMF is on Facebook. Every weekday I post a couple pieces that usually aren't on FMF. It's a great way to connect and get some extra money advice/news if you're on Facebook quite often.

Here are some pieces I found especially worthwhile and some of the carnivals Free Money Finance was in this week and my posts that were included:

November 11, 2010

My husband (age 38) and I (age 32) have FINALLY reached the coveted 6 months of expenses in an emergency fund threshold (please don't tell me I need 8 months now!), and want to turn our attention to retirement savings, which have been woefully neglected by both of us.

We are each eligible for an employer sponsored plan, but neither offers a matching contribution. I currently have about $7k in an IRA, which was rolled over from a previous employer's 401(k) plan, but my husband does not have any kind of retirement account set up.

My question is this: Should we use our employer sponsored 401(k) plans as our primary means of retirement savings, or - since there is no matching contribution - should we use traditional IRA's instead? Using the employer plan is an attractive option because the benefit of reducing our taxable income would be realized on monthly basis, where as with an IRA, this benefit would only be realized when we file our taxes (please correct me if I'm wrong about that).

However, between the state of the economy and the general ambivalence that each of us feels about our current jobs, it's entirely possible that one or both of us will change jobs at some point in the not so distant future, which means we'd have to roll-over the funds from our employer sponsored plan. This makes an IRA seem more attractive because it means that regardless of where we're working, we can continue to save in one place (each).

To further complicate matters, I'm wondering whether we should skip 401(k)/traditional IRA's completely and use Roth IRAs instead, but the truth is that I have no idea whether the tax advantages of each will benefit us more now or later.

Our goal is to save 10% of our pre-tax income in 2011 in whichever kind of retirement vehicle we select, and another 10% for mid-term savings. In 2012, we will revisit the overall percentage of our income that we're saving, and how we're dividing it up, most likely upping the ante to 15% for retirement savings, and 5% (or more, depending on what happens to our salaries between now and then) for mid-term savings. (By which I mean savings for things like home-improvement projects, vacation, or other things we "want," but don't necessarily "need.")

1. Meet Mr. Tax Man. As a millionaire, you're going to be on the hook for doing a greater amount of (financial) good for your country.

2. It's like taking a second job. Possessions take time to maintain.

3. Meet the Joneses. Once you have the means to buy a bigger house, purchase a nicer car and join that nearby golf club, you're most likely going to meet a whole new group of people -- wealthier people.

7. Whom can you trust? You will likely receive a steady flow of e-mail, snail mail and voice-mail offers from lawyers, investment advisers and tax attorneys all eager for your money -- or, that is, your "business."

8. You'll suddenly be less secure. As a millionaire, you are now a target for an unwelcome group of people: criminals.

A few thoughts on these:

It goes without saying (though I'm going to say it anyway) that most people would prefer to have these "problems" over the (usually) much worse problems associated with not having enough money/financial resources. So it's really a "good problem to have."

Yes, as you make more, you pay more in taxes. Welcome to America. If you like, you can choose to pay less -- just decide to earn less. ;-) Taxes are my #1 expense and I wouldn't mind paying them if I thought government officials were spending them wisely. But "government spending" and "wisely" rarely go together IMO.

Yes, money takes time to manage. Hey, but what else would you do if you didn't read FMF for tips on growing and managing your net worth? ;-)

Here's key #1 to many of these issues: keep your spending in check as your income increases. By doing this, your net worth will grow tremendously and you'll be able to avoid many of the money suckers (like an expensive home) that keep you from becoming wealthy.

Here's key #2 to many of these issues: don't tell anyone how much money you have. If you do, people will expect nice gifts, want some handouts, try to rob you, etc. Just keep the fact that you're doing so well to yourself!

Avoid following the stock market on a daily basis. I know what the market is doing IN GENERAL (up or down) every day, but I don't watch it closely.) I load my fund values in Quicken once a month (at the end of the month when I update my net worth) and that's the only time I look at specific valuations. If I followed the ups and downs of the market as closely as some of my friends, I'd probably have several ulcers by now.

How about advice from you millionaires out there? Any tips you'd add that will help people better manage a large amount of money?

Everybody would love to strike it rich quick. Many investments are touted as a way to make easy money quickly. There is no such thing as easy money. The same investments that have the power to make you money have the exact same potential to lose your money as well. It’s important to be aware of the risks and rewards that come with different types of investments.

Let’s take a look at 5 investment strategies that could make you money or cost you a fortune.

1. Daytrading stocks.

Television shows like CNBC’s Fast Money and Options Express glorify the gains that can be made from rapidly buying, selling stock and option positions. There is serious money that can be made by trading these securities on a daily or weekly basis but trading these securities is not for the novice. Daytrading requires lots of time to keep up with the movements of stocks during the day. It also requires a sophisticated knowledge of technical analysis and the ability to properly plot entrance and exit points. Even with all of this advanced preparation, it is still difficult to time the movement of the market as a whole.

2. Buying foreclosed properties.

There are a ton of late night infomercials proclaiming the benefits of buying foreclosed properties. You can buy a home for $10,000 or less and flip it a few months later for a substantial profit. This all sounds good but foreclosed homes often have more problems than buyers bargained for. Foreclosed homes are often money pits that require thousands of dollars in repairs just to bring them up to code. Many homeowners have left their houses in deplorable conditions. Another danger is that foreclosed homes may not be the bargain that you think they are. You have to do your homework and make sure that you are not catching a falling knife in a neighborhood whose prices will continue to drop.

3. Speculating on currency.

George Soros was catapulted into the billionaire stratosphere due to his good fortune in currency speculation. Soros made a huge bet against the pound sterling. His gamble paid off and Soros netted a $1 billion dollar profit. Trading currency can either net you a tidy sum of profit or leave you flat broke depending on the movement of foreign currencies. The truth is that the average investor will lose money trading currencies. Not only are you trying to beat professional investment banks, you are also trying to outsmart foreign governments. The Forex currency market may sound like a way to quick profits but most speculators will find themselves drowning in trading losses.

4. Trading futures contracts.

If you want to know what the futures market is like, think back to the movie Trading Places. In that movie the Duke Brothers bet their entire fortune on a crop report and ended up broke. These highly sophisticated derivatives were only available to professional investors at one day. Today, due to online brokers and exchange traded funds just about any investor can gain access to the futures market. Futures contracts rely heavily on leverage to amplify the returns of the underlying commodity. This is great if you guess right on the price movement because you can make a lot of dough. However, if you guess incorrectly, be prepared to pay up. You might find that you would have better luck playing blackjack at a casino than guessing the price movement of pork bellies.

5. Short selling a stock.

Short selling a stock is basically borrowing shares from an investor that owns them and betting that the stock’s price will continue to decline. Short selling was once reserved for hedge funds that wanted to take long and short positions on separate stocks. Short selling has become popular today amongst regular investors due to the profit potentials. Some professional investors made a fortune during the financial crisis by shorting individual banks and financial institutions. The danger of short selling is that you could fall prey to a short squeeze. A stock’s price could move against you and you could find yourself scrambling to cover your position as the price soars higher and higher.

What do you think of these different types of investment strategies? Do you know of any others that have high risk/reward potential?

November 10, 2010

I was wondering if your thoughts about MBAs have changed amidst the current economic climate.

I'm interested in going back to school to get an MBA, but I'm not sure it's worth it. A bit about me: I have a finance undergraduate degree, a law degree, and I'm currently a licensed attorney. The legal job market is fairly grim, especially for someone who didn't graduate from a top tier law school. I did receive a fairly substantial scholarship, so my student loan debt isn't a bad as it could be, but it's still fairly high. I'm working as an attorney for a non-profit right now (making a non-profit salary), but I'm itching to get back into the business world.

Does it make sense to take on additional student loan debt for an MBA in this economic climate? I'm looking at San Diego State's MBA program, which is much cheaper than UC San Diego's program. It's still a budding thought, but I'd appreciate your insight on this issue.

I responded, but also wanted to hear your thoughts. What's your advice for him?

I just got a letter in my Blue Cash® from American Express statement and starting in December, you will be able to redeem your cash back as a statement credit any time you reach $25. You no longer need to wait to get the statement credit annually.

This is an improvement as for as I'm concerned and makes this card simply the best cash rebate card.

I agree that this is an improvement. I always hated to wait a full year to get my credit with that card. And while it's a great cash back credit card, it's not the best cash back card IMO. I think the 2% "Schwab" (in parentheses because it's no longer associated with Schwab) is -- though I don't know if they are taking new applicants (and the Amex is one of the best cash back cards (IMO) that's open to new applicants).

Since the switch, I've received two deposits to my checking account (not to my brokerage account anymore) for the full 2% on every FIA card purchase. Card still works the same way as before, only difference is you can't see the balance at schwab.com.

This is an improvement as well. Instead of having the rebate deposited in a Schwab account, it can now be sent to any account. I'm going to set up mine to go to my checking account (and close down my Schwab account.)

Around this time each year I get asked for gift recommendations for the holiday season. In particular, people want to know what money-related books I like and suggest they give others as presents. Here's my list as well as the reasons I like each book:

The Millionaire Next Door: Surprising Secrets of America's Wealthy -- I always list this book first in any list of this type because it's the book that has influenced my finances the most. I read it when it first came out and started to apply many of the principles it discusses shortly thereafter. After years and years of doing this, my net worth is quite healthy. If you or someone you know/love wants to become wealthy, give them this book, tell them to read and apply it, and be sure to have them send you a thank you card in 20 years. ;-)

The Automatic Millionaire: A Powerful One-Step Plan to Live and Finish Rich -- One of the biggest ways (IMO) to becoming wealthy is to set up your saving and investing to happen automatically as early in your life as possible. This book is the one that started the "automatic" concept and is a great overall read. I've applied it for almost 20 years now and IT WORKS! I owe David Bach a BIG thank you!!!! (and you will too if you apply it)

While some people want to keep working to avoid boredom, many more (the majority) want/need to work simply to keep money flowing in. Not a surprise given the state of most Americans' retirement savings.

Since "15 percent have a job they say is fun and enjoyable", does this mean that 85% dislike their jobs? If so, that's a big "ugh".

Yes, income is likely to go down in retirement. Actually, I'm surprised that so many retirees (one-third) made the same or more than they did while working.